IL&FS crisis: India’s Lehman moment
Infrastructure Leasing & Financial Services Limited (IL&FS) is an Indian infrastructure development and finance company.
It operates through more than 250 subsidiaries including IL & FS Investment managers, IL & FS financial services and IL & FS Transportation networks India Limited (ITNL). Its projects include some of the largest infrastructure projects in India including India's longest tunnel, Dr. Syama Prasad Mookerjee Tunnel, which was opened for traffic in April 2017. In April 2019, its newly constituted board informed investors that the company had 302 entities through which it currently operates, through a highly complex network of multiple business verticals.
IL&FS was formed in 1987 as an "RBI registered Core Investment Company" by three financial institutions, namely the Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI), to provide finance and loans for major infrastructure projects.[9] Gradually, as the organization needed better financing, it additionally opened itself to two large international players, namely Mitsubishi (through Orix corporation Japan) and the Abu Dhabi Investment authority. Subsequently, Life Insurance Corporation India, Orix and ADIA became its largest shareholders, a pattern that continues to this day.
Currently, its institutional shareholders include Life Insurance Corporation of India (LIC), ORIX and Abu Dhabi Investment Authority, with small shareholdings by a few Indian banks. State Bank of India (SBI) was a share holder till 2017, after which it sold its stake in the company. A few foreign investors including Greenspring associates remain investors in its subsidiary companies, especially IL&FS transportation and IL&FS infrastructure services.
In 2012, A2Z Group acquired the property management subsidiary of IL & FS (IL&FS Property Management & Services Ltd) in a cash and stock deal. The deal was done through its subsidiary A2Z Infraservices Ltd for Rs250 million. While Rs70 million cash payment was made to IL&FS Infrastructure Equity Fund and IL&FS Employees Welfare Trust, the infrastructure major also took a 20% stake in A2Z Infraservices by way of a stock swap.
IL&FS has 256 group companies as of 2018, including subsidiaries, joint venture companies and associate entities.[15] Though on the surface, the company appears to have 23 direct subsidiaries, 141 indirect subsidiaries (including special purpose vehicles for different projects), 6 joint ventures and 4 associate companies, each of them is further subdivided into additional legal entities, with much cross ownership as well as ownership by investment vehicles of various governments.
While some of its subsidiaries (such as IL&FS Transport) ran into high losses in 2018 and found it difficult to repay their loans, others (such as IL&FS investment managers) posted profits of Rs.725 million in 2018, a 33% Profit after tax.
Some of them are listed below-
Infrastructure Services
· IL&FS Energy Development Company Limited: energy sector arm involved in development of power generation and transmission projects
· IL&FS Infrastructure Development Corporation Limited: advisory and project development
· IL&FS Transportation Networks Limited: involved in the development and implementation of projects related to surface transport (highways, flyovers, bridges and roads)
· IL&FS Environmental Infrastructure & Services Limited
· IL&FS Education and Technology Services Limited (Headed by RCM Reddy)[17]
· New Tirupur Area Development Corporation Limited (an SPV to implement the Tirupur Area Development Programme)
· Noida Toll Bridge Company Limited (an SPV to operate and maintain the DND Flyway connecting Delhi with Noida)
Financial Services
· IL&FS Financial Services Limited (Investment Banking Arm of IL&FS)
· IL&FS Investment Managers Limited (domestic private equity fund management)
· ORIX Auto Infrastructure Services Limited (services related to transport finance and transport infrastructure)
· IL&FS Trust Company Limited - ITCL (Services: * Debenture and Bond Trusteeship * Trusteeship and Investor Representative for Securitised Paper * Services as Security Trustee and Facility Agent * secure document management, scanning, processing, Records management * Para Legal Services)
Technology Services
· IL&FS Technologies Ltd. (IT Arm of IL&FS group)
Projects
IL&FS has several projects in different sectors including Transportation, Area Development, e-Governance, Health Initiatives, Cluster Development, Finance, Power, Ports, Water and Waste Water, Urban Infrastructure, Environment, Education, and Tourism.
In 2009, it became the new promoter of the Maytas Infra Ltd. and in January 2011, Maytas Infra was taken over by IL&FS and renamed to IL&FS Engineering and Construction Company Limited[18] In September 2009, it picked up a "significant minority stake" in the Reliance Industries' special economic zone project in Haryana.
IL & FS was the principal lender behind the construction of the 9.28 km long Dr. Syama Prasad Mookerjee Tunnel, located on the route of NH 44 in Jammu and Kashmir. Its work was started on July 2011 and the tunnel was opened for traffic after its inauguration by the Indian Prime Minister Narendra Modi on 2 April 2017. Built on an estimated budget of ?3,720 crore (US$550 million), the main tunnel is 13 metres in diameter, while the parallel escape tunnel is 6 metres in diameter. The main and escape tunnels are connected by 29 cross passages located at intervals of every 300 metres. It is the first tunnel in India with a fully integrated tunnel system and is expected to reduce the distance between Jammu and Srinagar by 30.11 km (18.7 mi), reducing the travel time by two hours.
IL & FS also has large investments in its own subsidiaries, as well as in the equity market. In September 2018, these amounted to nearly Rs. 10,000 crores.
Ownership
As of March 2018, the largest shareholders of IL & FS Investment services were as follows:
· LIC : 25%
· ORIX Corporation, Japan (a part of Mitsubishi Keiritsu): 23%
· IL & FS Employees welfare trust : 12
· Abu Dhabi investment authority : 12%
· HDFC Ltd : 9%
· Central bank of India : 7%
· State Bank of India : 12%
Defaults on bonds by IL & FS financial services
From July to September 2018, two out of IL & FS's 256 subsidiaries reported having trouble paying back loans and inter corporate deposits to other banks and lenders, resulting in the RBI requesting its major share holders to rescue it.[22] In July 2018, Hindu Businessline reported that the road arm of IL & FS was having difficulty making payments due on its bonds.[23] In the same month, Business Standard reported that its founder Ravi Parthasarathy would be leaving the firm due to medical reasons, after having headed the firm for 30 years.[24]
In early September 2018, Moneylife India reported that one of IL & FS's subsidiaries had been unable to repay a Rs. 1000 crore short term loan taken from SIDBI, resulting in SIDBI asking one of its officers to resign.[25] Subsequently, Bloomberg Quint, Business standard and Economic times reported that one of the IL & FS group of companies called IL & FS Financial services limited had defaulted on its commercial paper payments.[26] This led to news of a possible audit by the Reserve bank of India. IL&FS Financial Services Ltd., one of the group's many financial subsidiaries had defaulted on repaying about Rs. 450 crore worth of inter-corporate deposits to Small Industries Development Bank of India (SIDBI). On 27 September 2018, IL & FS Financial services informed the BSE that it had defaulted on a Rs 52.4-crore repayment of short-term deposits and Rs 104-crore term deposit.
However, in its replies to investors and the BSE, IL&FS investment services (IVC) clarified that the news items did not relate to it, as these were two completely different legal entities.[27] A similar letter was published by IL & FS Transportation.
On 1st Oct, 2018, the Government of India took steps to take control of the company and arrest spread of the contagion to the financial markets. A new board was constituted as the earlier board was deemed to have failed to discharge its duties. The new board consists of Kotak Mahindra Bank managing director Uday Kotak, former IAS officer & Tech Mahindra boss Vineet Nayyar, former Sebi chief G N Bajpai, former ICICI Bank chairman G C Chaturvedi, former IAS officers Malini Shankar and Nand Kishore.
Serious Fraud Investigation Office (SFIO) started investigation as there were huge procedural lapses and top management was not reachable. Newspapers reported the lavish salaries management gave itself at the expense of the public money. In the absence of adequate supervision by RBI or shareholders or any claw back provisions on remuneration, the management treated the company as its fiefdom.
On 02 April 2019, former vice chairman of IL&FS, Hari Sankaran, was arrested by SFIO in Mumbai for fraud and causing wrongful loss to the troubled infrastructure lender. He is accused of granting loans to entities that were not credit-worthy or declared as non-performing accounts causing loss to the company and its creditors. The SFIO has been granted custody of Sankaran till April 4. The Serious Fraud Investigation Office (SFIO) arrested former IL&FS Financial Services (IFIN) MD & CEO, Ramesh Bawa in the case. This is the second arrest made by the investigation arm of the Ministry of Corporate Affairs (MCA). Other than SFIO, the Enforcement Directorate is also probing the alleged irregularities in IFIN. In February the central agency had registered a money laundering case against ILFS Rail Ltd, ILF Transportation Networks Ltd, Ravi Parthasarthy, former chairman and managing director of IL&FS and Hari Sankaran and Bawa.
The initial SFIO probe revealed that there were major lapses in Deloitte's audit of the IL&FS.
The IL&FS Transportation Networks Ltd. Stock has fallen from Rs. 120 in Jan 2017 to Rs. 1.60 in Sep 2019.
The BSE Sensex fell from 38723 in Aug 2018 to 33690 in Oct 2018.
Many Mutual Fund debt schemes had to take a hit due to the downgrade in ratings of the debt papers of IL&FS. Markets regulator Sebi issued a directive soon on terms and conditions for mutual funds to separate their distressed debt assets, a process widely known as 'side pocketing'.
Rating company ICRA has downgraded the debt-laden Infrastructure Leasing and Financial Services (IL&FS) by at least nine notches citing cash crunch pressure. The rating company ICRA has downgraded the company’s bonds and long term loans to BB from AA+.
IL&FS directors had tried to keep many ratings in "private", push rating officials to softens ratings, even influenced them to change the language in rating rational and occasionally inflated numbers in fishing for better ratings. The 105-page Grant Thornton (GT) report details out anomalies, issues of professional compromises and corporate governance surrounding the CRAs who rated IL&FS in the last ten years.
The role of five CRAs- CARE, Icra, India Ratings , Brickwork and CRISIL have been reviewed by GT which assigned a total of 429 ratings during the period between 2011 and 2019.
The development comes close to the heels of the CARE Ratings, MD & CEO, Rajesh Mokashi and Managing Director and Group CEO of ICRA Naresh Takkar sent on leave after anonymous complaint received by Sebi.
Market regulator SEBI has imposed a penalty of Rs 25 lakhs each on ICRA, CARE and India Ratings, for their failure to exercise due diligence while assigning ratings to the crisis-hit IL&FS.